ASXC - Intuitive Surgical: High Quality Market Leader With Ample Runway For Growth

Summary

• Intuitive Surgical has enjoyed years of strong growth but there is still more room for further expansion for all major revenue streams.
• Ion Endoluminal is expected to remain a relatively small revenue stream.
• Competition is increasing which may pressurize margins and market share, but longer term, the market is likely to whittle down to just a few strong players.

Intuitive Surgical ( ISRG ) has enjoyed years of strong growth but there is still ample room for further revenue and profit expansion. Competition is on the rise, but longer term, the market is likely to consolidate and Intuitive, with its strong financials, and solid track record is positioned to remain among the last ones standing.

Brief Overview

Intuitive Surgical is the world’s leading surgical robot maker with a market share of around 80% worldwide. The company's product portfolio largely comprises two major products - (i) the da Vinci robotic surgical system (used for minimally invasive surgeries including general surgery such as hernia repair, colorectal surgery, cholecystectomy; urologic procedures such as prostatectomy, partial nephrectomy; gynecologic surgeries such as hysterectomy, and sacrocolpopexy; cardiothoracic surgeries; and head and neck specialties) and (ii) the Ion Endoluminal robot-assisted bronchoscopy system used for minimally invasive lung biopsies.

In the surgical robot space, Intuitive Surgical’s da Vinci platform competes against players such as Medtronic (with its surgical robot platform Hugo) ( MDT ), Johnson & Johnson (with its platform Ottava) ( JNJ ), Asensus Surgical (Senhance) ( ASXC ), and CMR Surgical (with Versius), while in the robot-assisted bronchoscopy space Intuitive Surgical’s Ion Endoluminal system competes against Johnson & Johnson’s Monarch.

For the financial year ended December 2021, Intuitive Surgical generated revenues of USD 5.7 billion (up 31% YoY), gross profits of USD 3.9 billion (up 38% YoY), and net profits of USD 1.7 billion (up 60% YoY). Product revenues (comprising revenues generated from sales of systems, instruments, and accessories) accounted for 82% of revenues while service sales (revenues from system maintenance services) accounted for the rest. The majority of revenues are generated in the U.S.

Looking ahead…

More room for robotic surgery system penetration both in the U.S. and internationally

Laparoscopy is one of the most common means of non-robotic minimally invasive surgery however robotic surgery (which is generally costlier than laparoscopy) is increasingly gaining favor. A study of general surgery procedures found that both open surgery and laparoscopy declined while robotic surgery increased, a trend seen in other specific surgeries as well with high magnitudes of increase for certain procedures.

There is still plenty of room for growth. Nearly 1.6 million procedures were performed worldwide using da Vinci systems in 2021. Da Vinci is far away the most popular robotic surgery platform currently and therefore the total number of robot-assisted surgical procedures performed worldwide is likely to be not much more than this figure.

By comparison, currently more than 13 million laparoscopies are performed worldwide annually with about a third of that (or more than 4 million) performed in the U.S. - Intuitive’s biggest market which accounts for about 61% of its systems installed base which amounted to 6,730 units at the end of December 2021. These figures suggest Intuitive Surgical performed less than 1 million robotic surgery procedures in the U.S., and while it is not clear whether robotic surgery would entirely replace laparoscopy, it nevertheless implies an untapped market for systems sales that is possibly two or maybe three times bigger in the U.S. alone at current system utilization rates. Assuming a reduced market share of around 60% and without factoring any price increases (with competition heating up particularly from Medtronic, Intuitive may play the long game and limit increases to system prices which are currently around USD 0.5 million to USD 2.5 million per system), there is still some significant revenue potential from systems sales in the U.S. alone.

The bigger opportunity is likely to be outside the U.S. where Intuitive has been seeing good traction (U.S. 's revenue share declined from 70% of total revenues in 2019 to 67% of total revenues in 2021). Less than a million of da Vinci’s procedures were performed internationally in 2021 against an estimated 8 million or so laparoscopic procedures performed worldwide annually. Again, robotic surgery may not entirely replace laparoscopic procedures, but even then, the untapped market is enormous suggesting tremendous revenue potential amounting to several billion dollars even after factoring a reduced market share and limited price increases. Combining both the U.S. and outside the U.S., Intuitive Surgical could potentially deliver a two or three-fold increase in total i.e., cumulative systems sales, amounting to several billion dollars in the years ahead even without any price increases.

Instruments & accessories revenue and services revenue to expand on the back of growing system installed base

Intuitive Surgical generally earns between USD 600 and USD 3,500 in instruments and accessories revenue per surgical procedure performed (as of 2021), down slightly from USD 700 to USD 3,500 in 2019 partly as a result of efforts to reduce instruments costs through Intuitive’s Extended Use program which according to the company generates cost savings of around 9%-15% for customers. The price drop has not had any impact on this revenue stream as continued procedure adoption and a growing installed base have been strong growth drivers for instruments & accessories revenues which reached USD 3.1 billion in 2021 from USD 2.46 billion during pandemic-hit 2020 and USD 2.41 billion in 2019. Looking ahead, any pricing pressures are likely to be outweighed by the sheer growth in Intuitive’s global installed base in the years to come.

Intuitive generated USD 916 million in service revenues in 2021, up from USD 724 million in 2020 and 2019, an increase driven by its growing installed base. Intuitive earns between USD 80,000 to USD 190,000 annually on service fees per system and further growth in their systems installed base could drive this revenue stream in the years to come.

With several drivers in place to drive top line growth, profits are poised to increase as well, barring any unforeseen costs such as litigation etc. Intuitive’s net margins have hovered around 30% over the past few years.

Ion Endoluminal likely to remain a small revenue stream but has good growth prospects

Intuitive’s Ion Endoluminal system which received FDA clearance only in 2019 , currently has a negligible impact on revenues and profits. Looking ahead, Ion Endoluminal is likely to remain a small proportion of Intuitive’s revenue mix but in absolute terms the product’s revenue potential is nothing to sneeze at. At around USD 600,000 , Intuitive’s Ion Endoluminal system sells for considerably less than a da Vinci system but with just 129 systems in total installed currently, there is a long runway for growth; approximately 500,000 bronchoscopies are performed every year and it is likely that only a tiny fraction of this is performed as robot assisted bronchoscopies (in 2019 rival Monarch announced a milestone of 1,000 bronchoscopic procedures performed since the platform received clearance in 2018).

Risks

Medium term competition

Competition is expected to increase from players such as Medtronic, J&J, and Zimmer Biomet which may constrict Intuitive’s pricing power and possible margins as well. Medtronic’s Hugo, like Intuitive’s da Vinci, is apparently a very competitive system for urology and gynecology procedures but Medtronic is about 20% to 25% cheaper than Intuitive’s da Vinci, which better positions the platform to capture cost-conscious customers worldwide. Meanwhile Asensus Surgical Senhance platform differentiates itself through haptic feedback and has been getting traction in Japan .

Conclusion

The robot-assisted surgical robot market has tremendous room for growth and market leader Intuitive Surgical is positioned to benefit with revenue potential amounting to several billion dollars. Competition, however, is increasing, which may lead to medium term margin pressure and market share erosion.

Longer term however, cost constraints related to platform learning curves and surgeon training programs may give rise to industry consolidation, limiting the market to a handful of the most competitive players and Intuitive as the market leader with a product that boasts years of proven reliability and financially one of the strongest players is likely to be among the best positioned to capture untapped market share and remain among the last players standing. A P/E of nearly 60 may be viewed as pricey to some but others may view it as fair for a financially strong and long standing market leader in a growing industry with high switching costs and high barriers to entry.

Analysts are split between buy and hold.

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